RBI likely to hold key interest rates on Tuesday

Mumbai: The Reserve Bank of India (RBI) is expected to hold interest rates at its monetary policy review on Tuesday and is more likely to cut rates by the end of the year when there is more clarity on the monsoons.

According to the Export-Import Bank of India, the rising trend in inflation seen over the last two months and the rainfall deficits are expected to weigh over the considerations of weak economic performance.

“Consequently, policy rate cut by the RBI in its third bi-monthly policy appears bleak. The RBI is likely to maintain status quo on rates in its bi-monthly policy meet on August 4,” it said.

Consumer price-indexed (CPI), or retail, inflation rose to an eight-month high of 5.4 percent in June riding on costlier food, fuel, housing, clothing and footwear.

While the CPI-urban for June inched higher to 4.55 percent, the CPI-rural jumped to 6.07 percent from 5.52 percent in May.

At its last review in June, RBI cut the repo rate, at which it lends short-term to commercial banks, from 7.5 percent to 7.25, but left other parameters like the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) unchanged at 4 percent and 21.5 percent, respectively.

It was the third repo cut this year in June, while the central bank had indicated that there may not be any further cuts in the near term.

Giving the reasons for the June policy stance, RBI Governor Raghuram Rajan said plans for lower food output needed to be in place, global financial markets were volatile, factory output was recovering unevenly, services sector was emitting mixed signals, fuel inflation was up, exports were down and liquidity had improved.

According to India Ratings and Research, the RBI is likely to wait and watch on rates on Tuesday.

“Ind-Ra expects the policy stance to reflect RBI’s continued intention to anchor both inflation and inflationary expectations. This has become even more important for RBI after its agreement with the government to follow a framework of inflation targeting,” it said.

Meanwhile, American research firm Moody’s Analytics, in a report this week, warned against the NDA government’s moves to tamper with the autonomy of the Reserve Bank of India in deciding on interest rates as potentially damaging for the economy.

“We believe that a government-elected panel undermines the RBI’s independence. Moving to the new model would severely dent the RBI’s competency: Credibility would be lower, politics would drive decisions, and transparency would be reduced,” the economic research company said.

The government last week released the draft Indian Financial Code, which proposes to remove the RBI governor’s veto right in the monetary policy committee.

Besides taking away the RBI governor’s authority to veto interest rate decisions, the draft also proposed that the monetary policy committee would have four representatives of the government and only three from the central bank, including the RBI “chairperson”.

“Overall, we believe that tampering with the central bank’s independence would make it difficult to anchor inflation expectations. This would weigh on India’s economic prospects, particularly financial market stability,” said the Moody’s report.

“But given the criticism of the draft bill, it is unlikely to pass parliament,” it added.

Terming the measure as a “dangerous road ahead”, it said India’s monetary policy, with Governor Raghuram Rajan at the helm, has been effective.

The major reforms undertaken by the Indian government for raising economic growth and maintaining macroeconomic stability have made the country one of the fastest growing major economies in the world, said Subhash Chandra Garg, Secretary, Department of Economic Affairs (DEA).

Garg was addressing the Special Event hosted by US-India Strategic Partnership Forum on ‘Indian Economy: Prospect and Challenges’ in Washington D.C on Friday.

Indian economy needs more reforms.

He said the launch of the Goods and Services Tax (GST) represented an “historic economic and political achievement, unprecedented in Indian tax and economic reforms, which has rekindled optimism on structural reforms.” He further emphasized that India carried-out such major reforms when the global economy was slow.

“With the cyclical recovery in global growth amid supportive monetary conditions and the transient impact of the major structural reforms over, India will continue to perform robustly,” Garg said.

During his meetings, Garg highlighted that the digital age technologies have profound implications for policies concerning every aspects of the economy. It also has enormous implications for emerging markets and developing countries.

He expressed that the response to such a transformation will have to shift from ‘catch up’ growth to adoption/adaption of digital technologies for development and growth.

Garg also informed that India has started adopting policies and programmes for transforming systems of delivery of services using digital technologies and connecting every Indian with digital technologies and access through Aadhaar and other such means.

Indian economy should be on rise. Image: Mapsofindia

While citing the example of expanding mobile data access, he mentioned that India is now the largest consumer of mobile data in the world with 11 gigabytes mobile data consumption per month. He informed that India is investing in digital technologies, encouraging private sector to adapt these technologies and also addressing the taxation related issues by introducing equalisation levy.

Garg is currently on an official tour to Washington D.C. to attend the Spring Meetings of the International Monetary Fund and the World Bank and other associated meetings. He is accompanied by Urjit Patel, Governor, Reserve Bank of India and other senior officials. IANS